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    Audt.oper'n&complaudit Audt.oper'n&complaudit Document Transcript

    • Chapter 16 - Auditing Operations and Completing the Audit Chapter 16 Auditing Operations and Completing the AuditTrue / False Questions1. Analytical procedures are often used for verification of income statement accounts.True False2. The Miscellaneous Revenue account should only be analyzed if it is material in amount.True False3. Internal control over payroll is enhanced when the personnel department distributes payrollchecks.True False4. The auditors have a responsibility to report on all FASB-required supplementaryinformation.True False5. Subsequent events that provide additional evidence as to conditions that existed at thebalance sheet date may result in adjusting journal entries.True False6. Dual dating of an audit report extends the auditors liability for disclosure through the laterdate for all areas of the financial statements.True False7. If management fails to list an unasserted claim in the letter of inquiry to a lawyer, thelawyer is not required to inform the auditors of the omission.True False 16-1
    • Chapter 16 - Auditing Operations and Completing the Audit8. Normally, general risk contingencies need not be disclosed in the financial statements.True False9. If not adjusted, a situation in which the total likely misstatement in the financial statementsexceeds a material amount is likely to lead to an audit report modification.True False10. Common to future purchase commitments is the fact that they should be recorded asliabilities at discounted values as of year-end.True FalseMultiple Choice Questions11. Analytical procedures are required as a part of theA. Detailed tests of balances.B. Internal control assessment.C. Overall review at the conclusion of the audit.D. Substantive testing.12. The statement that best expresses the auditors responsibility with respect to eventsoccurring between the balance sheet date and the end of his audit is that:A. The auditor has no responsibility for events occurring in the subsequent period unless theseevents affect transactions recorded on or before the balance sheet date.B. The auditors responsibility is to determine that a proper cutoff has been made and thattransactions recorded on or before the balance sheet date actually occurred.C. The auditor is fully responsible for events occurring in the subsequent period and shouldextend all detailed procedures through the last day of field work.D. The auditor is responsible for determining that a proper cutoff has been made andperforming a general review of events occurring in the subsequent period. 16-2
    • Chapter 16 - Auditing Operations and Completing the Audit13. Shortly after year-end Zero Corporation was informed of the bankruptcy of Bingo. ZeroCorporation showed a receivable of $10,000 due from Bingo as of year-end—none of whichseems recoverable. The receivable had been questionable for some time as Bingo had beenexperiencing financial difficulties for the past several years. Yet, Bingos bankruptcy did notoccur until after Zero Corporations year-end. Under these circumstances:A. Option AB. Option BC. Option CD. Option D14. In auditing the balance sheet, most revenue and expense accounts are also audited. Whichaccounts are most likely to be audited when auditing Accounts Receivable?A. Sales and Cost of Goods Sold.B. Interest and Bad Debt Expense.C. Sales and Bad Debt Expense.D. Interest and Cost of Goods Sold.15. Auditors should perform audit procedures relating to subsequent events?A. Through year end.B. Through issuance of the audit report.C. Through the last day of field work.D. For a reasonable period after year end. 16-3
    • Chapter 16 - Auditing Operations and Completing the Audit16. Which of the following procedures would an auditor most likely perform while evaluatingaudit findings at the conclusion of an audit?A. Obtain assurance from the entitys attorney that all material litigation has been disclosed inthe financial statements.B. Verify the clerical accuracy of the entitys proof of cash and its bank cutoff statement.C. Determine whether reportable conditions have corrected.D. Develop an estimate of the total likely misstatement in the financial statements.17. Which of the following ledger accounts would be least likely to be analyzed in detail byauditors?A. Miscellaneous revenue.B. Professional fees.C. Travel expense.D. Repairs and maintenance.18. When auditing the statement of cash flows of a profitable, growing company whichcombination is most likely?A. Option AB. Option BC. Option CD. Option D19. The audit of which of the following balance sheet accounts does not normally result inverification of an income statement account?A. Cash.B. Accounts receivable.C. Property, plant and equipment.D. Intangible assets. 16-4
    • Chapter 16 - Auditing Operations and Completing the Audit20. An example of an internal control weakness is to assign the payroll department theresponsibility for:A. Preparing the payroll expense distribution.B. Preparing the payroll checks.C. Authorizing increases in pay.D. Preparing journal entries for payroll expense.21. An example of an internal control weakness is to assign the personnel departmentresponsibility for:A. Distribution of paychecks.B. Hiring personnel.C. Authorizing deductions from pay.D. Interviewing employees for jobs.22. Which of the following audit procedures is aimed at determining whether every name onthe company payroll is an employee actually on the job?A. A surprise observation of a paycheck distribution.B. A test of payroll extensions.C. Analytical comparisons of budgeted to actual payroll expense.D. Comparison of payee names on canceled payroll checks with the payroll register.23. Which of the following is not a procedure that is designed to provide evidence about theexistence of loss contingencies?A. Obtaining a lawyers letter.B. Confirming accounts payable.C. Reviewing the minutes of board of directors meetings.D. Review correspondence with banks.24. Which of the following types of matters do not generally require disclosure in thefinancial statements?A. General risk contingencies.B. Commitments.C. Loss contingencies.D. Liabilities to related parties. 16-5
    • Chapter 16 - Auditing Operations and Completing the Audit25. Material loss contingencies should be recorded in the financial statements if availableinformation indicates it is probable that a loss had been sustained prior to the balance sheetdate and the amount of such loss can be reasonably estimated. These considerations willaffect the audit report as follows:A. If a loss has been recorded in accordance with these criteria, the auditor may issue anunqualified opinion but is required to point out the contingency in an explanatory paragraphof the report.B. If a loss meets these criteria but is disclosed in the financial statement notes rather thanbeing recorded therein, the auditor may issue an unqualified opinion, but is required to pointout the contingency in an explanatory paragraph of the report.C. If a loss meets these criteria but is disclosed in the financial statement notes rather thanbeing recorded therein, the auditor may issue an unqualified opinion, but should consideradding an explanatory paragraph as a means of emphasizing the disclosure.D. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in thenotes to the financial statements rather than being recorded therein, the auditor may issue anunqualified opinion.26. A refusal by a lawyer to furnish information related to litigation included in the letter ofinquiry is likely to result in:A. Confirmation of related lawsuits with the claimants.B. Qualification of the audit report.C. An assessment that loss of the litigation is probable.D. An adverse opinion.27. If, after issuing an audit report, the auditors find that they have failed to perform certainsignificant audit procedures they should first:A. Attempt to determine whether their report is still being relied upon by third parties.B. Notify regulatory agencies.C. Notify legal counsel.D. Wait until the beginning of the next years audit to determine whether misstatements haveoccurred. 16-6
    • Chapter 16 - Auditing Operations and Completing the Audit28. Which of the following is not a procedure that auditors typically perform to search forsignificant events during the subsequent period?A. Review minutes of board of directors meeting.B. Review the latest available interim financial statements.C. Inquire about any unusual adjustments made subsequent to the balance sheet date.D. Review changes in internal control during the period subsequent to the balance sheet date.29. Which of the following subsequent events might require an adjustment to the clientsfinancial statements?A. A business combination with another company.B. Loss on the sale of a closely-held investment.C. Loss of plant and equipment due to a fire.D. Retirement of bonds payable at a loss.30. Authorization of which of the following is least likely to be found during a review of theminutes of the board of directors?A. Dividends.B. New debt issuance.C. New bank accounts.D. Writeoff of trade accounts receivable.31. Which of the following is not a procedure normally performed while completing theaudit?A. Obtain a lawyers letter.B. Obtain a representations letter.C. Perform an overall review using analytical procedures.D. Obtain confirmation of capital stockholdings from shareholders.32. Auditors must communicate internal control "significant deficiencies" to:A. The audit committee.B. The shareholders.C. The SEC.D. The Federal Trade Commission. 16-7
    • Chapter 16 - Auditing Operations and Completing the Audit33. Which of the following procedures is not a procedure that is completed near the end of theengagement?A. Review cash transactions.B. Review to identify subsequent events.C. Obtain the lawyers letter.D. Obtain the letter of representations.34. Which of the following information must be reported on in the auditors report?A. FASB-required supplementary information.B. Other information in client-prepared documents.C. Information accompanying financial statements in auditor-submitted documents.D. GASB-required supplementary information.35. In evaluating whether there is a sufficiently low probability of material misstatement inthe financial statements, the auditors accumulate:A. Likely misstatements in the financial statements.B. Known misstatements in the financial statements.C. Known, projected and other estimated misstatements in the financial statements.D. Known, projected and potential misstatements in the financial statements.36. Specific misstatement in one of a clients 2,000 accounts receivable is referred to as a(n):A. Extrapolation difference.B. Known misstatement.C. Likely misstatement.D. Projected misstatement.37. The review of audit working papers by the audit partner is normally completed:A. Prior to year-end.B. Immediately as each working paper is completed.C. Near the completion of field work.D. After issuance of the audit report, but prior to required subsequent event reviewprocedures. 16-8
    • Chapter 16 - Auditing Operations and Completing the Audit38. Management estimates the companys allowance for doubtful accounts as $200,000, andthe auditors develop an estimate that suggests that the amount should be between $230,000and $250,000. The known misstatement in this situation is:A. $0B. $30,000C. $40,000D. $50,00039. Management estimates the companys allowance for doubtful accounts as $200,000, andthe auditors develop an estimate that suggests that the amount should be between $230,000and $250,000. The likely misstatement in this situation is:A. $0B. $30,000C. $40,000D. $50,00040. An approach that quantifies the total likely misstatement as of the current year-end basedon the effects of reflecting misstatements during the current year (and not considering anyunadjusted previous year misstatements) is referred to as the:A. Evaluation materiality approach.B. Iron curtain approach.C. Projected misstatement approach.D. Rollover approach.41. An approach that quantifies the total likely misstatement as of the current year-end basedon the effects of reflecting all misstatements existing in the balance sheet at the end of thecurrent year, irrespective of whether the misstatements occurred in the current or previousyears is referred to as the:A. Evaluation materiality approach.B. Iron curtain approach.C. Projected misstatement approach.D. Rollover approach. 16-9
    • Chapter 16 - Auditing Operations and Completing the Audit42. A clients previous two years of financial statements understated estimated warrantypayable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditorsestimate that the accrual is understated by an additional $60,000. In this years audit $100,000represents a material amount. Assuming that the entire understatement is to be recorded,following SEC SAB 108 the decrease in this years income due to these understatements is:A. $0B. $60,000C. $110,000D. $140,00043. A clients previous two years financial statements understated estimated warranty payableby $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate thatthe accrual is understated by an additional $60,000. In this years audit $55,000 represents amaterial amount. Assuming that the entire understatement is to be recorded, following SECSAB 108 the decrease in this years income due to these understatements is:A. $0B. $60,000C. $110,000D. $140,00044. One reason why the independent auditors perform analytical procedures on the clientsoperations is to identify:A. Weaknesses of a material nature in internal control.B. Non-compliance with prescribed control procedures.C. Improper separation of accounting and other financial duties.D. Unusual transactions.45. Which of the following is an analytical procedure that should be applied to the incomestatement?A. Select sales and expense items and trace amounts to related supporting documents.B. Ascertain that the net income amount in the statement of cash flows agrees with the netincome amount in the income statement.C. Obtain from the proper client representatives, the beginning and ending inventory amountsthat were used to determine costs of sales.D. Compare the actual revenues and expenses with the corresponding figures of the previousyear and investigate significant differences. 16-10
    • Chapter 16 - Auditing Operations and Completing the Audit46. It would be appropriate for the payroll accounting department to be responsible for whichof the following functions?A. Approval of employee time records.B. Maintenance of records of employment, discharges, and pay increases.C. Preparation of periodic governmental reports as to employees earnings and withholdingtaxes.D. Distribution of paychecks to employees.47. Which of the following is the best reason why the auditors should consider observing aclients distribution of regular payroll checks?A. Separation of payroll duties is less than adequate for effective internal control.B. Total payroll costs are a significant part of total operating costs.C. The auditors did not observe the distribution of the entire regular payroll during the audit inthe prior year.D. Employee turnover is excessive.48. To minimize the opportunities for fraud, unclaimed cash payroll should be:A. Deposited in a safe deposit box.B. Held by the payroll custodian.C. Deposited in a special bank account.D. Held by the controller.49. The purpose of segregating the duties of distributing payroll checks and hiring personnelis to:A. Separate the custody of assets from the accounting for those assets.B. Establish clear lines of authority and responsibility.C. Separate duties within the accounting function.D. Separate the authorization of transactions from the custody of related assets. 16-11
    • Chapter 16 - Auditing Operations and Completing the Audit50. A CPA reviews a clients payroll procedures. The CPA would consider internal control tobe less than effective if a payroll department supervisor was assigned the responsibility for:A. Reviewing and approving time reports for subordinate employees.B. Distributing payroll checks to employees.C. Hiring subordinate employees.D. Initiating requests for salary adjustments for subordinate employees.51. A common audit procedure in the audit of payroll transactions involves tracing selecteditems from the payroll journal to employee time cards that have been approved by supervisorypersonnel. This procedure is designed to provide evidence in support of the audit propositionthat:A. Only bona fide employees worked and their pay was properly computed.B. Jobs on which employees worked were charged with the appropriate labor cost.C. Internal control relating to payroll disbursements are operating effectively.D. Employees worked the number of hours for which their pay was computed.52. Which of the following material events occurring subsequent to the balance sheet datewould require an adjustment to the financial statements before they could be issued?A. Sale of long-term debt or capital stock.B. Loss of a plant as a result of a flood.C. Major purchase of a business which is expected to double the sales volume.D. Settlement of litigation in excess of the recorded liability.53. With respect to issuance of an audit report which is dual dated for a subsequent eventoccurring after the completion of field work but before issuance of the auditors report, theauditors responsibility for events occurring subsequent to the completion of field work is:A. Extended to include all events occurring until the date of the last subsequent event referredto.B. Limited to the specific event referred to.C. Limited to all events occurring through the date of issuance of the report.D. Extended to include all events occurring through the date of submission of the report to theclient. 16-12
    • Chapter 16 - Auditing Operations and Completing the Audit54. An auditors decision concerning whether or not to "dual date" the audit report is basedupon the auditors willingness to:A. Extend auditing procedures.B. Accept responsibility for year-end adjusting entries.C. Permit inclusion of a note captioned: event (unaudited) subsequent to the date of theauditors report.D. Assume responsibility for resolving all events subsequent to the issuance of the auditorsreport.55. Auditors often request that the audit client send a letter of inquiry to those attorneys whohave been consulted with respect to litigation, claims, or assessments. The primary reason forthis request is to provide the auditors with:A. An estimate of the dollar amount of the probable loss.B. An expert opinion as to whether a loss is possible, probable or remote.C. Information concerning the progress of cases to date.D. Corroborative audit evidence.56. The auditors primary means of obtaining corroboration of managements informationconcerning litigation is a:A. Letter of audit inquiry to the clients lawyer.B. Letter of corroboration from the auditors lawyer upon review of the legal documentation.C. Confirmation of claims and assessments from the other parties to the litigation.D. Confirmation of claims and assessments from an officer of the court presiding over thelitigation.57. Which of the following auditing procedures is ordinarily performed last?A. Reading of the minutes of the directors meetings.B. Confirming accounts payable.C. Obtaining a management representation letter.D. Testing of the purchasing function. 16-13
    • Chapter 16 - Auditing Operations and Completing the Audit58. Which of the following is not correct relating to representation letters?A. They are ordinarily dated as of the date of the audit report.B. They are signed by members of top management.C. They must be obtained for audits.D. They often serve as a substitute for the application of other procedures.59. The date the auditor grants the client permission to use the audit report in connection withthe financial statements is the:A. Last day of significant field work.B. Report cutoff date.C. Report release date.D. Representation date.60. Which of the following statements ordinarily is not included among the written clientrepresentations made by the chief executive officer and the chief financial officer?A. "Sufficient audit evidence has been made available to the auditor to permit the issuance ofan unqualified opinion."B. "There are no unasserted claims or assessments that our lawyer has advised us are probableof assertion and must be disclosed."C. "We have no plans or intentions that may materially affect the carrying value orclassification of assets and liabilities."D. "No events have occurred subsequent to the balance sheet date that would requireadjustment to, or disclosure in, the financial statements."61. To which of the following matters would materiality limits not apply when obtainingwritten client representations?A. Violations of state labor regulations.B. Disclosure of line-of-credit arrangements.C. Information about related party transactions.D. Instances of fraud involving management. 16-14
    • Chapter 16 - Auditing Operations and Completing the Audit62. The auditors best course of action with respect to "other financial information" includedin a client prepared annual report containing the auditors report is to:A. Indicate in the auditors report, that the "other financial information" is unaudited.B. Consider whether the "other financial information" is accurate by performing a limitedreview.C. Obtain written representations from managements as to the material accuracy of the "otherfinancial information."D. Read and consider the manner of presentation of the "other financial information."63. In the course of the audit of financial statements for the purpose of expressing an opinionthereon, the auditors will normally prepare a schedule of unadjusted differences for which theauditors did not propose adjustment when they were identified. What is the primary purposeserved by this schedule?A. To point out to the responsible client officials the errors made by various companypersonnel.B. To summarize the adjustments that must be made before the company can prepare andsubmit its federal tax return.C. To identify the potential financial statement effects of misstatement or disputed items thatwere considered immaterial when discovered.D. To summarize the misstatements made by the company so that corrections can be madeafter the audited financial statements are released.64. An auditor will ordinarily examine invoices from lawyers primarily in order to:A. Substantiate accruals.B. Assess the legal ramifications of litigation in progress.C. Estimate the dollar amount of contingent liabilities.D. Identify possible unasserted litigation, claims and assessments.65. The auditors primary means of obtaining corroboration of managements informationconcerning litigation is a:A. Letter of audit inquiry to the clients lawyer.B. Letter of corroboration from the auditors lawyer upon review of the legal documentation.C. Confirmation of claims and assessments from the other parties to the litigation.D. Confirmation of claims and assessments from an officer of the court presiding over thelitigation. 16-15
    • Chapter 16 - Auditing Operations and Completing the AuditEssay Questions66. Auditors must be concerned with events that occur subsequent to the balance sheet date,because the events may need to be reflected in the financial statements.a. Describe the two general types of subsequent events.b. What is the auditors responsibility with respect to detecting subsequent events?c. List three audit procedures that are used by the auditors to search for subsequent events.67. Auditors are concerned with the existence of loss contingencies that may affect the clientsfinancial statements. One way that the auditors obtain evidence about existing losscontingencies is through the lawyers letter.a. Describe the information that the auditors wish to obtain about the litigation being handledby a lawyer.b. Describe three other procedures that are used by auditors to discover existing losscontingencies. 16-16
    • Chapter 16 - Auditing Operations and Completing the Audit68. The auditors responsibility for information that accompanies audited financial statementsvaries with the nature of the information and the nature of the document.a. Describe the auditors responsibility regarding FASB-required supplementary information.b. Describe the auditors responsibility regarding other information in client-prepareddocuments.c. Describe the auditors responsibility regarding information accompanying financialstatements in auditor-prepared documents. 16-17
    • Chapter 16 - Auditing Operations and Completing the AuditChapter 16 Auditing Operations and Completing the Audit Answer KeyTrue / False Questions1. Analytical procedures are often used for verification of income statement accounts.TRUEDifficulty: Easy2. The Miscellaneous Revenue account should only be analyzed if it is material in amount.FALSEDifficulty: Medium3. Internal control over payroll is enhanced when the personnel department distributes payrollchecks.FALSEDifficulty: Easy4. The auditors have a responsibility to report on all FASB-required supplementaryinformation.FALSEDifficulty: Medium 16-18
    • Chapter 16 - Auditing Operations and Completing the Audit5. Subsequent events that provide additional evidence as to conditions that existed at thebalance sheet date may result in adjusting journal entries.TRUEDifficulty: Medium6. Dual dating of an audit report extends the auditors liability for disclosure through the laterdate for all areas of the financial statements.FALSEDifficulty: Medium7. If management fails to list an unasserted claim in the letter of inquiry to a lawyer, thelawyer is not required to inform the auditors of the omission.TRUEDifficulty: Medium8. Normally, general risk contingencies need not be disclosed in the financial statements.TRUEDifficulty: Medium9. If not adjusted, a situation in which the total likely misstatement in the financial statementsexceeds a material amount is likely to lead to an audit report modification.TRUEDifficulty: Easy 16-19
    • Chapter 16 - Auditing Operations and Completing the Audit10. Common to future purchase commitments is the fact that they should be recorded asliabilities at discounted values as of year-end.FALSEDifficulty: MediumMultiple Choice Questions11. Analytical procedures are required as a part of theA. Detailed tests of balances.B. Internal control assessment.C. Overall review at the conclusion of the audit.D. Substantive testing.Difficulty: Medium12. The statement that best expresses the auditors responsibility with respect to eventsoccurring between the balance sheet date and the end of his audit is that:A. The auditor has no responsibility for events occurring in the subsequent period unless theseevents affect transactions recorded on or before the balance sheet date.B. The auditors responsibility is to determine that a proper cutoff has been made and thattransactions recorded on or before the balance sheet date actually occurred.C. The auditor is fully responsible for events occurring in the subsequent period and shouldextend all detailed procedures through the last day of field work.D. The auditor is responsible for determining that a proper cutoff has been made andperforming a general review of events occurring in the subsequent period.Difficulty: Hard 16-20
    • Chapter 16 - Auditing Operations and Completing the Audit13. Shortly after year-end Zero Corporation was informed of the bankruptcy of Bingo. ZeroCorporation showed a receivable of $10,000 due from Bingo as of year-end—none of whichseems recoverable. The receivable had been questionable for some time as Bingo had beenexperiencing financial difficulties for the past several years. Yet, Bingos bankruptcy did notoccur until after Zero Corporations year-end. Under these circumstances:A. Option AB. Option BC. Option CD. Option DDifficulty: Hard14. In auditing the balance sheet, most revenue and expense accounts are also audited. Whichaccounts are most likely to be audited when auditing Accounts Receivable?A. Sales and Cost of Goods Sold.B. Interest and Bad Debt Expense.C. Sales and Bad Debt Expense.D. Interest and Cost of Goods Sold.Difficulty: Medium15. Auditors should perform audit procedures relating to subsequent events?A. Through year end.B. Through issuance of the audit report.C. Through the last day of field work.D. For a reasonable period after year end.Difficulty: Easy 16-21
    • Chapter 16 - Auditing Operations and Completing the Audit16. Which of the following procedures would an auditor most likely perform while evaluatingaudit findings at the conclusion of an audit?A. Obtain assurance from the entitys attorney that all material litigation has been disclosed inthe financial statements.B. Verify the clerical accuracy of the entitys proof of cash and its bank cutoff statement.C. Determine whether reportable conditions have corrected.D. Develop an estimate of the total likely misstatement in the financial statements.Difficulty: Medium17. Which of the following ledger accounts would be least likely to be analyzed in detail byauditors?A. Miscellaneous revenue.B. Professional fees.C. Travel expense.D. Repairs and maintenance.Difficulty: Hard18. When auditing the statement of cash flows of a profitable, growing company whichcombination is most likely?A. Option AB. Option BC. Option CD. Option DDifficulty: Hard 16-22
    • Chapter 16 - Auditing Operations and Completing the Audit19. The audit of which of the following balance sheet accounts does not normally result inverification of an income statement account?A. Cash.B. Accounts receivable.C. Property, plant and equipment.D. Intangible assets.Difficulty: Hard20. An example of an internal control weakness is to assign the payroll department theresponsibility for:A. Preparing the payroll expense distribution.B. Preparing the payroll checks.C. Authorizing increases in pay.D. Preparing journal entries for payroll expense.Difficulty: Medium21. An example of an internal control weakness is to assign the personnel departmentresponsibility for:A. Distribution of paychecks.B. Hiring personnel.C. Authorizing deductions from pay.D. Interviewing employees for jobs.Difficulty: Easy22. Which of the following audit procedures is aimed at determining whether every name onthe company payroll is an employee actually on the job?A. A surprise observation of a paycheck distribution.B. A test of payroll extensions.C. Analytical comparisons of budgeted to actual payroll expense.D. Comparison of payee names on canceled payroll checks with the payroll register.Difficulty: Medium 16-23
    • Chapter 16 - Auditing Operations and Completing the Audit23. Which of the following is not a procedure that is designed to provide evidence about theexistence of loss contingencies?A. Obtaining a lawyers letter.B. Confirming accounts payable.C. Reviewing the minutes of board of directors meetings.D. Review correspondence with banks.Difficulty: Medium24. Which of the following types of matters do not generally require disclosure in thefinancial statements?A. General risk contingencies.B. Commitments.C. Loss contingencies.D. Liabilities to related parties.Difficulty: Medium25. Material loss contingencies should be recorded in the financial statements if availableinformation indicates it is probable that a loss had been sustained prior to the balance sheetdate and the amount of such loss can be reasonably estimated. These considerations willaffect the audit report as follows:A. If a loss has been recorded in accordance with these criteria, the auditor may issue anunqualified opinion but is required to point out the contingency in an explanatory paragraphof the report.B. If a loss meets these criteria but is disclosed in the financial statement notes rather thanbeing recorded therein, the auditor may issue an unqualified opinion, but is required to pointout the contingency in an explanatory paragraph of the report.C. If a loss meets these criteria but is disclosed in the financial statement notes rather thanbeing recorded therein, the auditor may issue an unqualified opinion, but should consideradding an explanatory paragraph as a means of emphasizing the disclosure.D. If a loss is probable but the amount cannot be reasonably estimated and is disclosed in thenotes to the financial statements rather than being recorded therein, the auditor may issue anunqualified opinion.Difficulty: Hard 16-24
    • Chapter 16 - Auditing Operations and Completing the Audit26. A refusal by a lawyer to furnish information related to litigation included in the letter ofinquiry is likely to result in:A. Confirmation of related lawsuits with the claimants.B. Qualification of the audit report.C. An assessment that loss of the litigation is probable.D. An adverse opinion.Difficulty: Medium27. If, after issuing an audit report, the auditors find that they have failed to perform certainsignificant audit procedures they should first:A. Attempt to determine whether their report is still being relied upon by third parties.B. Notify regulatory agencies.C. Notify legal counsel.D. Wait until the beginning of the next years audit to determine whether misstatements haveoccurred.Difficulty: Medium28. Which of the following is not a procedure that auditors typically perform to search forsignificant events during the subsequent period?A. Review minutes of board of directors meeting.B. Review the latest available interim financial statements.C. Inquire about any unusual adjustments made subsequent to the balance sheet date.D. Review changes in internal control during the period subsequent to the balance sheet date.Difficulty: Hard29. Which of the following subsequent events might require an adjustment to the clientsfinancial statements?A. A business combination with another company.B. Loss on the sale of a closely-held investment.C. Loss of plant and equipment due to a fire.D. Retirement of bonds payable at a loss.Difficulty: Medium 16-25
    • Chapter 16 - Auditing Operations and Completing the Audit30. Authorization of which of the following is least likely to be found during a review of theminutes of the board of directors?A. Dividends.B. New debt issuance.C. New bank accounts.D. Writeoff of trade accounts receivable.Difficulty: Medium31. Which of the following is not a procedure normally performed while completing theaudit?A. Obtain a lawyers letter.B. Obtain a representations letter.C. Perform an overall review using analytical procedures.D. Obtain confirmation of capital stockholdings from shareholders.Difficulty: Medium32. Auditors must communicate internal control "significant deficiencies" to:A. The audit committee.B. The shareholders.C. The SEC.D. The Federal Trade Commission.Difficulty: Medium33. Which of the following procedures is not a procedure that is completed near the end of theengagement?A. Review cash transactions.B. Review to identify subsequent events.C. Obtain the lawyers letter.D. Obtain the letter of representations.Difficulty: Medium 16-26
    • Chapter 16 - Auditing Operations and Completing the Audit34. Which of the following information must be reported on in the auditors report?A. FASB-required supplementary information.B. Other information in client-prepared documents.C. Information accompanying financial statements in auditor-submitted documents.D. GASB-required supplementary information.Difficulty: Medium35. In evaluating whether there is a sufficiently low probability of material misstatement inthe financial statements, the auditors accumulate:A. Likely misstatements in the financial statements.B. Known misstatements in the financial statements.C. Known, projected and other estimated misstatements in the financial statements.D. Known, projected and potential misstatements in the financial statements.Difficulty: Hard36. Specific misstatement in one of a clients 2,000 accounts receivable is referred to as a(n):A. Extrapolation difference.B. Known misstatement.C. Likely misstatement.D. Projected misstatement.Difficulty: Hard37. The review of audit working papers by the audit partner is normally completed:A. Prior to year-end.B. Immediately as each working paper is completed.C. Near the completion of field work.D. After issuance of the audit report, but prior to required subsequent event reviewprocedures.Difficulty: Easy 16-27
    • Chapter 16 - Auditing Operations and Completing the Audit38. Management estimates the companys allowance for doubtful accounts as $200,000, andthe auditors develop an estimate that suggests that the amount should be between $230,000and $250,000. The known misstatement in this situation is:A. $0B. $30,000C. $40,000D. $50,000Difficulty: Hard39. Management estimates the companys allowance for doubtful accounts as $200,000, andthe auditors develop an estimate that suggests that the amount should be between $230,000and $250,000. The likely misstatement in this situation is:A. $0B. $30,000C. $40,000D. $50,000Difficulty: Medium40. An approach that quantifies the total likely misstatement as of the current year-end basedon the effects of reflecting misstatements during the current year (and not considering anyunadjusted previous year misstatements) is referred to as the:A. Evaluation materiality approach.B. Iron curtain approach.C. Projected misstatement approach.D. Rollover approach.Difficulty: Hard 16-28
    • Chapter 16 - Auditing Operations and Completing the Audit41. An approach that quantifies the total likely misstatement as of the current year-end basedon the effects of reflecting all misstatements existing in the balance sheet at the end of thecurrent year, irrespective of whether the misstatements occurred in the current or previousyears is referred to as the:A. Evaluation materiality approach.B. Iron curtain approach.C. Projected misstatement approach.D. Rollover approach.Difficulty: Hard42. A clients previous two years of financial statements understated estimated warrantypayable by $30,000 and $50,000 respectively, immaterial amounts. This year the auditorsestimate that the accrual is understated by an additional $60,000. In this years audit $100,000represents a material amount. Assuming that the entire understatement is to be recorded,following SEC SAB 108 the decrease in this years income due to these understatements is:A. $0B. $60,000C. $110,000D. $140,000Difficulty: Hard43. A clients previous two years financial statements understated estimated warranty payableby $30,000 and $50,000 respectively, immaterial amounts. This year the auditors estimate thatthe accrual is understated by an additional $60,000. In this years audit $55,000 represents amaterial amount. Assuming that the entire understatement is to be recorded, following SECSAB 108 the decrease in this years income due to these understatements is:A. $0B. $60,000C. $110,000D. $140,000Difficulty: Hard 16-29
    • Chapter 16 - Auditing Operations and Completing the Audit44. One reason why the independent auditors perform analytical procedures on the clientsoperations is to identify:A. Weaknesses of a material nature in internal control.B. Non-compliance with prescribed control procedures.C. Improper separation of accounting and other financial duties.D. Unusual transactions.Difficulty: MediumSource: AICPA45. Which of the following is an analytical procedure that should be applied to the incomestatement?A. Select sales and expense items and trace amounts to related supporting documents.B. Ascertain that the net income amount in the statement of cash flows agrees with the netincome amount in the income statement.C. Obtain from the proper client representatives, the beginning and ending inventory amountsthat were used to determine costs of sales.D. Compare the actual revenues and expenses with the corresponding figures of the previousyear and investigate significant differences.Difficulty: EasySource: AICPA46. It would be appropriate for the payroll accounting department to be responsible for whichof the following functions?A. Approval of employee time records.B. Maintenance of records of employment, discharges, and pay increases.C. Preparation of periodic governmental reports as to employees earnings and withholdingtaxes.D. Distribution of paychecks to employees.Difficulty: MediumSource: AICPA 16-30
    • Chapter 16 - Auditing Operations and Completing the Audit47. Which of the following is the best reason why the auditors should consider observing aclients distribution of regular payroll checks?A. Separation of payroll duties is less than adequate for effective internal control.B. Total payroll costs are a significant part of total operating costs.C. The auditors did not observe the distribution of the entire regular payroll during the audit inthe prior year.D. Employee turnover is excessive.Difficulty: MediumSource: AICPA48. To minimize the opportunities for fraud, unclaimed cash payroll should be:A. Deposited in a safe deposit box.B. Held by the payroll custodian.C. Deposited in a special bank account.D. Held by the controller.Difficulty: EasySource: AICPA49. The purpose of segregating the duties of distributing payroll checks and hiring personnelis to:A. Separate the custody of assets from the accounting for those assets.B. Establish clear lines of authority and responsibility.C. Separate duties within the accounting function.D. Separate the authorization of transactions from the custody of related assets.Difficulty: EasySource: IIA 16-31
    • Chapter 16 - Auditing Operations and Completing the Audit50. A CPA reviews a clients payroll procedures. The CPA would consider internal control tobe less than effective if a payroll department supervisor was assigned the responsibility for:A. Reviewing and approving time reports for subordinate employees.B. Distributing payroll checks to employees.C. Hiring subordinate employees.D. Initiating requests for salary adjustments for subordinate employees.Difficulty: MediumSource: AICPA51. A common audit procedure in the audit of payroll transactions involves tracing selecteditems from the payroll journal to employee time cards that have been approved by supervisorypersonnel. This procedure is designed to provide evidence in support of the audit propositionthat:A. Only bona fide employees worked and their pay was properly computed.B. Jobs on which employees worked were charged with the appropriate labor cost.C. Internal control relating to payroll disbursements are operating effectively.D. Employees worked the number of hours for which their pay was computed.Difficulty: MediumSource: AICPA52. Which of the following material events occurring subsequent to the balance sheet datewould require an adjustment to the financial statements before they could be issued?A. Sale of long-term debt or capital stock.B. Loss of a plant as a result of a flood.C. Major purchase of a business which is expected to double the sales volume.D. Settlement of litigation in excess of the recorded liability.Difficulty: MediumSource: AICPA 16-32
    • Chapter 16 - Auditing Operations and Completing the Audit53. With respect to issuance of an audit report which is dual dated for a subsequent eventoccurring after the completion of field work but before issuance of the auditors report, theauditors responsibility for events occurring subsequent to the completion of field work is:A. Extended to include all events occurring until the date of the last subsequent event referredto.B. Limited to the specific event referred to.C. Limited to all events occurring through the date of issuance of the report.D. Extended to include all events occurring through the date of submission of the report to theclient.Difficulty: MediumSource: AICPA54. An auditors decision concerning whether or not to "dual date" the audit report is basedupon the auditors willingness to:A. Extend auditing procedures.B. Accept responsibility for year-end adjusting entries.C. Permit inclusion of a note captioned: event (unaudited) subsequent to the date of theauditors report.D. Assume responsibility for resolving all events subsequent to the issuance of the auditorsreport.Difficulty: MediumSource: AICPA55. Auditors often request that the audit client send a letter of inquiry to those attorneys whohave been consulted with respect to litigation, claims, or assessments. The primary reason forthis request is to provide the auditors with:A. An estimate of the dollar amount of the probable loss.B. An expert opinion as to whether a loss is possible, probable or remote.C. Information concerning the progress of cases to date.D. Corroborative audit evidence.Difficulty: HardSource: AICPA 16-33
    • Chapter 16 - Auditing Operations and Completing the Audit56. The auditors primary means of obtaining corroboration of managements informationconcerning litigation is a:A. Letter of audit inquiry to the clients lawyer.B. Letter of corroboration from the auditors lawyer upon review of the legal documentation.C. Confirmation of claims and assessments from the other parties to the litigation.D. Confirmation of claims and assessments from an officer of the court presiding over thelitigation.Difficulty: MediumSource: AICPA57. Which of the following auditing procedures is ordinarily performed last?A. Reading of the minutes of the directors meetings.B. Confirming accounts payable.C. Obtaining a management representation letter.D. Testing of the purchasing function.Difficulty: EasySource: AICPA58. Which of the following is not correct relating to representation letters?A. They are ordinarily dated as of the date of the audit report.B. They are signed by members of top management.C. They must be obtained for audits.D. They often serve as a substitute for the application of other procedures.Difficulty: Medium59. The date the auditor grants the client permission to use the audit report in connection withthe financial statements is the:A. Last day of significant field work.B. Report cutoff date.C. Report release date.D. Representation date.Difficulty: Easy 16-34
    • Chapter 16 - Auditing Operations and Completing the Audit60. Which of the following statements ordinarily is not included among the written clientrepresentations made by the chief executive officer and the chief financial officer?A. "Sufficient audit evidence has been made available to the auditor to permit the issuance ofan unqualified opinion."B. "There are no unasserted claims or assessments that our lawyer has advised us are probableof assertion and must be disclosed."C. "We have no plans or intentions that may materially affect the carrying value orclassification of assets and liabilities."D. "No events have occurred subsequent to the balance sheet date that would requireadjustment to, or disclosure in, the financial statements."Difficulty: HardSource: AICPA61. To which of the following matters would materiality limits not apply when obtainingwritten client representations?A. Violations of state labor regulations.B. Disclosure of line-of-credit arrangements.C. Information about related party transactions.D. Instances of fraud involving management.Difficulty: HardSource: AICPA62. The auditors best course of action with respect to "other financial information" includedin a client prepared annual report containing the auditors report is to:A. Indicate in the auditors report, that the "other financial information" is unaudited.B. Consider whether the "other financial information" is accurate by performing a limitedreview.C. Obtain written representations from managements as to the material accuracy of the "otherfinancial information."D. Read and consider the manner of presentation of the "other financial information."Difficulty: HardSource: AICPA 16-35
    • Chapter 16 - Auditing Operations and Completing the Audit63. In the course of the audit of financial statements for the purpose of expressing an opinionthereon, the auditors will normally prepare a schedule of unadjusted differences for which theauditors did not propose adjustment when they were identified. What is the primary purposeserved by this schedule?A. To point out to the responsible client officials the errors made by various companypersonnel.B. To summarize the adjustments that must be made before the company can prepare andsubmit its federal tax return.C. To identify the potential financial statement effects of misstatement or disputed items thatwere considered immaterial when discovered.D. To summarize the misstatements made by the company so that corrections can be madeafter the audited financial statements are released.Difficulty: HardSource: AICPA64. An auditor will ordinarily examine invoices from lawyers primarily in order to:A. Substantiate accruals.B. Assess the legal ramifications of litigation in progress.C. Estimate the dollar amount of contingent liabilities.D. Identify possible unasserted litigation, claims and assessments.Difficulty: MediumSource: AICPA65. The auditors primary means of obtaining corroboration of managements informationconcerning litigation is a:A. Letter of audit inquiry to the clients lawyer.B. Letter of corroboration from the auditors lawyer upon review of the legal documentation.C. Confirmation of claims and assessments from the other parties to the litigation.D. Confirmation of claims and assessments from an officer of the court presiding over thelitigation.Difficulty: MediumSource: AICPA 16-36
    • Chapter 16 - Auditing Operations and Completing the AuditEssay Questions66. Auditors must be concerned with events that occur subsequent to the balance sheet date,because the events may need to be reflected in the financial statements.a. Describe the two general types of subsequent events.b. What is the auditors responsibility with respect to detecting subsequent events?c. List three audit procedures that are used by the auditors to search for subsequent events.a. The two types of subsequent events are:Type 1--events that provide additional evidence about conditions that existed at the balancesheet date and affect the estimates included in the statements.Type 2--events that provide evidence about conditions that arose subsequent to the balancesheet date and require disclosure in the financial statements.b. Auditors have a responsibility to search for material subsequent events to the last day offield work (the date of the auditors report).c. Procedures that are used to search for subsequent events include (only three required):• Review interim financial statements.• Review minutes of directors and stockholders meetings.• Make inquiries of officers.• Obtain a letter from the clients attorney.• Obtain a letter of representations from management.Difficulty: Medium 16-37
    • Chapter 16 - Auditing Operations and Completing the Audit67. Auditors are concerned with the existence of loss contingencies that may affect the clientsfinancial statements. One way that the auditors obtain evidence about existing losscontingencies is through the lawyers letter.a. Describe the information that the auditors wish to obtain about the litigation being handledby a lawyer.b. Describe three other procedures that are used by auditors to discover existing losscontingencies.a. The auditors wish to obtain the following information about litigation:1. A description of the litigation situation and the accounting period to which it relates,2. The estimated amount of loss, and3. The probability of occurrence of the loss.b. Other procedures used by auditors to detect loss contingencies include (only threerequired):• Review the minutes of directors meetings.• Review correspondence with financial institutions.• Obtain a representations letter from the client.• Review prior tax returns.Difficulty: Hard68. The auditors responsibility for information that accompanies audited financial statementsvaries with the nature of the information and the nature of the document.a. Describe the auditors responsibility regarding FASB-required supplementary information.b. Describe the auditors responsibility regarding other information in client-prepareddocuments.c. Describe the auditors responsibility regarding information accompanying financialstatements in auditor-prepared documents.a. The auditors have a responsibility to perform a review of FASB-required supplementaryinformation, and include an indication in their report when they are unable to perform theprocedures or when they have reservations about the information.b. The auditors have a responsibility to read other information for inconsistency withinformation contained in the financial statements and obvious misstatements. Reservationswith respect to the information may be expressed in the auditors report.c. The auditors have a responsibility to report on all information accompanying financialstatements in auditor-prepared documents.Difficulty: Medium 16-38